‘Dairy Godfather’ Zheng Junhuai has returned to the industry after a spell in jail, saying he is the man to clean up the baby milk formula business

The man once known as the “Dairy Godfather” of China is making a bid for another title: “Comeback King”.

A decade ago, Zheng Junhuai was one of China’s best-known entrepreneurs. In the late 1980s, he had taken over a dying Mongolian dairy workshop and revived it to become China’s biggest dairy producer in terms of revenue by the early 2000s.

But as Yili’s fortunes grew, Zheng’s standing abruptly fell.

On the afternoon of December 17, 2004 – Zheng remembers the date clearly – he was hauled away by Hohhot prosecutors. One year later he was thrown in jail with a six-year sentence for embezzling more than 16 million yuan (HK$20 million).Zheng was released in 2008 after the sentence was reduced for good behaviour.

While he found work as a consultant, Zheng returned to the public eye only recently, when he was made chief executive of new baby milk formula enterprise Heilongjiang Red Star Group.

Zheng, 64, feels milk is his natural calling and that he is the man to clean up the industry, which has suffered a string of scandals.

His priority, he says, is simply to make good-quality milk powder for Chinese babies.

“After the huge ups and downs of these years, I regard fame and wealth as nothing important and I have a calm mind towards life,” he says.

“The only thing I want to do is devote my remaining energy to producing qualified baby formula so that Chinese parents don’t have to scramble at overseas markets.”

His ambition is to establish a trusted formula brand with a respectable market share in an industry dominated by foreign brands. Industry insiders warn the road ahead will be daunting.

Zheng’s name is less known today than a decade ago, when he was among China’s top entrepreneurs. After he turned around its debt-mired fortunes, Yili became China’s top dairy company. In 1996, Yili became the first mainland dairy enterprise to be listed.

In 2003, the company was the biggest in the industry in terms of revenue, producing liquid milk, ice cream and milk powder, with sales of 6.3 billion yuan and profits of 200 million yuan. In 2004, sales rose by 39 per cent.

Under his tutelage, some of Yili’s front-line workers rose to top management positions across the industry. Pan Gang , Yili’s current chairman, and Niu Gensheng , founder of Hong Kong-listed Mengniu Group, both learned the ropes from Zheng.

Whether Zheng can take his new formula, Qi Guan, to the same level of success is a key question. The market is highly suspicious of domestic-branded formula after the tainted milk scandals.

In those incidents dozens of mainland firms, including large producers such as Yili and Mengniu, were found to have mixed toxic melamine into their baby milk formula to raise protein levels. Six babies died from drinking the affected milk; 300,000 suffered kidney problems.

Zheng is acutely aware of consumers’ aversion to domestic brands. He says that many mainland dairy bosses do not give their offspring the milk powder they produce. “They know their products made according to China’s low standards are inferior to their foreign counterparts,” he says.

“My grandson was born in 2008 and he drank a Japanese-branded formula. As a man dedicating more than 20 years to this sector, this phenomenon is like a sword into my heart.”

Before the melamine scandal, domestic dairy enterprises had cornered 70 per cent of the market. That dominance evaporated overnight with the scandal – domestic brands now have 30 per cent of the market.

Qi Guan debuted in the middle of last year. Sales have been slow, but Zheng is patient.

“As long as your products’ quality is so good that it can pass any screening, consumers will absolutely choose you,” he says.

At 180 yuan for a tin of 800 grams, Qi Guan is cheaper than foreign brands. It’s fresher too, Zheng says, as it takes only one month to reach the consumer.

Industry experts are yet to be persuaded. Cao Mingshi, Shanghai Dairy Association’s deputy secretary, says prices must drop to 130-140 yuan per 800 grams for domestic formula to be more attractive to customers than buying overseas.

“I think Zheng Junhuai’s ambition will be hard to realise,” says Cao. “I admire his courage, coming back to the stage after a big frustration in life. But there are tremendously daunting challenges for him.”

Reputation is a big factor for parents in choosing formula, he says, and this cannot be built overnight.

Zheng says Qi Guan will be sold online as young parents are part of the “internet generation”.

What he will not do, he says, is sponsor or work with doctors who promote his formula.

Eric Zou, a manager at a Beijing office of a foreign dairy company, says: “Nine out of 10 formula giants around the world are either part of a pharmaceutical company or evolved from a drug company. This is not a coincidence. They have a good relationship with doctors and this helps form a good image among doctors for their formula.”

Zheng knows all too well the struggles to build a brand from scratch. When he left prison, he had no money as his 5 million yuan annual salary had been frozen by Yili, so he took on work as an industry consultant.

It was only three years later, in 2011, that he decided to come fully on board with privately run Heilongjiang Red Star Group. Zheng agreed to work for Red Star, which is based in Mudanjiang because he says both the provincial and municipal government support it.

He was named CEO in September, five years after his release from prison. The mainland’s company laws ban convicted embezzlers from serving as company executives for five years.

Zheng says he has installed cutting-edge machines made by Germany’s GEA Group and is producing milk that meets strict European standards. The company has equipment that can eradicate 99.99 per cent of bacillus in raw milk – above the mainland’s standards of 90 per cent.

Red Star’s raw milk is bought from a farm of the Hong Kong-listed Modern Farming in Heilongjiang . But it is planning to build its own farm next year with the aim of raising 10,000 cows shipped from Australia.

The Mudanjiang government has sold land to Red Star at subsidised rates and promised to subsidise each imported cow by 10,000 yuan. Zheng’s company must pay 35,000 yuan per cow.

Cao cautions that Zheng’s experience with Yili may not be relevant to today’s market.

“There is a dichotomy between the current market and the previous market Zheng is familiar with,” he says. “In the past, milk products could be sold easily. Today, customers are picky.”

Zheng takes such criticism in his stride and says he welcomes the changes to the industry.

China, shamed by the milk powder scandals, has vowed to boost public confidence. Premier Li Keqiang hosted a State Council meeting in May discussing how to improve quality.

He spent more than three years in prison but Zheng Junhuai says he emerged from it healthier, both mentally and physically.

He also learned one important lesson: blame yourself for anything that goes wrong, not others. “Blaming other people, you will get angry, but by blaming yourself, you won’t,” he says.

Before he was jailed, Zheng was diagnosed with a slew of illnesses, including hypertension, diabetes, and prostate and kidney disease. But he swears all the symptoms disappeared when he emerged from prison.

“I attribute this to a regular schedule in prison where I had a lot of rest,” he says. “At Yili, I was a workaholic who did not take any weekends off or public holidays for 20 years. Another reason is that inmates seldom ate meat.”

Zheng firmly believes that, if not for jail, he would have died from his illnesses and work stress.

These days, the new CEO of Red Star spends every morning hiking in the mountains of Mudanjiang before going to the company offices. He feels “quite comfortable when sweating”, he says.

Zheng is happy with this accomplishment as he had resolved to regain his health when the Inner Mongolia High Court handed him the guilty verdict after his trial for embezzlement.

He maintains his innocence to this day. He says he and four other former executives transformed the 16 million yuan of Yili’s earnings to establish a company to buy the milk giant’s non-tradeable shares in order to avoid any hostile acquisition.

Zheng says he had also planned to use the revenues of this trading company to reward top managers of Yili. But shortly after this company came into being, Zheng and his alliances were caught by prosecutors.

“I think they treated me wrong because I didn’t put any profits into my own pocket. All I did was for the stability and development of Yili,” he says, claiming he was the victim of a plot by a disgruntled senior official in Inner Mongolia. “His family members asked me to give Yili’s shares to them for free and I refused.”

Despite his freedom, Zheng is appealing his conviction but the case has not been heard in court.

His lawyer, Hohhot -based counsel Hao Runying, who is also a friend, says: “Judges at the Inner Mongolia High Court told me they prefer not to accept this case because they think the verdict has no problems. So we will appeal at the Supreme People’s Court.”

The court should consider that Zheng’s action was in the interest of his company and not his own, she says, even though his use of the money had not been approved by the board.

“Zheng was used to the work procedures of old state-owned enterprises, not modern enterprises’ structures. At Yili, he made decisions on everything,” she says.

Guest Speaker Mr. Hemant Amin, Founder, Chairman and CEO of Asiamin Capital, a single family office, and Founder and Chairman of the BRKets investor groupMarch 17th, 2015

Hemant, a big thank you for educating and inspiring the next generation of leaders. You are a rare positive role model in the Asian capital markets and you showed the students that it is possible to create value because one has the right values and mindset like Buffett and Munger! :)